In a bi-weekly geopolitical report published October 26, 20261, Patrick Fearon-Hernandez, CFA, of Confluence Investment Management challenges one of the most deeply held assumptions in global investment strategy: that the United States and China are on a collision course. His conclusion will surprise investors who have spent years pricing in the worst.
The Trap Reviewed
The analytical anchor is the Thucydides Trap, drawn from ancient Greek historian Thucydides' observation that an established superpower confronted by a rising challenger is likely to go to war. Graham Allison's 2017 study examined 16 such cases across five centuries and found 12 ended in war. The odds, on that basis, sit at 75%. Fearon-Hernandez takes those odds seriously. He does not dismiss Allison's work. But he argues the modern operating environment introduces a set of structural constraints that, taken cumulatively, shift the probability calculus in a more constructive direction.
The Weight of Constraints
Six major forces, Fearon-Hernandez argues, are pressing against the classical Thucydides dynamic.
Nuclear weapons remain the most powerful brake. China, which historically kept only a minimal arsenal, is estimated to have approximately 620 warheads today and is adding nearly 100 per year. US military projections suggest China's nuclear capability will match America's deployed arsenal by the mid-2030s. The Cold War precedent with the Soviet Union demonstrated that mutual assured destruction compels restraint even between bitter adversaries.
Demographics compound the restraint. The US military-age population share is projected to fall to 44.3% of the total by 2035, from a 1989 peak of 51.9%. China's military-age cohort is already in outright decline, expected to represent just 45.0% of its population by 2035, down from 55.9% in 2007. Smaller workforces limit economic output and reduce the resource base available for military investment.
Fiscal realities tighten the constraint further. US general government debt reached 111% of GDP in early 2026, exceeding prior wartime highs. Interest costs alone now rival or exceed the entire US defense budget. China's general government debt sits at approximately 100% of GDP, with Beijing's deep aversion to central borrowing acting as an internal check.
Industrial vulnerabilities cut in both directions. The US defense industry cannot rapidly replenish arsenals following the Iran war and remains dependent on Chinese-sourced rare-earth inputs, as the 2025 tariff retaliation episode demonstrated. China, for its part, has built enormous industrial excess capacity while suppressing domestic demand, leaving Beijing deeply dependent on export markets that a military conflict would immediately close.
Fractured global diplomacy and domestic political sentiment round out the picture. Nationalist populism in the US has produced broad war fatigue following Afghanistan, Iraq, and Iran. In China, Communist Party legitimacy continues to rest on rising living standards, a goal incompatible with the economic disruptions a US-China conflict would unleash.
Constructive Strategic Stability
These constraints, Fearon-Hernandez argues, were the likely catalyst for the formal agreement reached between President Trump and General Secretary Xi at their May 2026 summit. The framework, termed "Constructive Strategic Stability" (CSS), echoes the US-Soviet détente of the 1970s in character, if not in scope. Early signals of CSS in action include the US deliberately excluding China from penalties under "Operation Economic Outcast" against Iran and relaxing technology export restrictions. Beijing's restraint, notably, is less complete: Chinese military provocations against Philippine vessels in the South China Sea have resumed, and restrictions on rare-earth exports to Japanese manufacturers continue.
Room for Cooperation
Beneath the strategic standoff, Fearon-Hernandez identifies meaningful ground for mutually beneficial cooperation in artificial intelligence, semiconductor technology, and finance. US leadership in chip design and capital markets, combined with China's scale of industrial adoption and consumer market openness, creates complementary strengths. If intellectual property protections can be credibly assured, the AI value chain offers a practical arena for engagement regardless of the broader geopolitical temperature.
On the investment implications, Fearon-Hernandez is direct: "the risk of a US-China war may currently be less than might be implied by the Thucydides Trap theory," and "a world less at risk of a major war is probably better for risk assets, all else being equal." He adds that "Chinese stocks may face fewer geopolitical headwinds than investors realize." He is equally candid about the limits: "today's geopolitical, economic, and technological tensions between the US and China will likely continue for some time to come. They could even increase."
Five Key Takeaways for Advisors and Investors
- War risk is overstated relative to the Thucydides baseline. The cumulative weight of nuclear deterrence, demographics, fiscal constraints, industrial interdependency, and domestic politics reduces the realistic probability of direct US-China military conflict below what the historical 75% war rate implies.
- CSS is a real policy signal, not just diplomatic language. The Trump-Xi détente framework is already modifying US behavior in measurable ways, from Iran sanctions policy to technology export softening, and deserves to be treated as a durable near-term input to portfolio positioning.
- Chinese equities warrant a more open-minded assessment. Reduced geopolitical risk premiums are one legitimate argument for revisiting China-related equity exposure, independent of the well-documented domestic policy and profitability risks that remain.
- The AI investment boom may be geopolitically underpinned. Lower perceived war risk, combined with US-China complementarity in the AI value chain, may be a quiet structural support for the technology investment cycle, one that has not been fully articulated in market consensus.
- Tensions remain, and the balance of power is shifting. CSS is not peace. The power balance continues to tilt incrementally toward China. Advisors should frame any re-engagement with Chinese assets not as a geopolitical resolution, but as a calibrated response to a lower-risk, higher-constraint environment.
Footnote:
1 Fearon-Hernandez, Patrick. "The United States, China, and Constructive Strategic Stability." Bi-Weekly Geopolitical Report, Confluence Investment Management LLC, 26 Oct. 2026, https://www.confluenceinvestment.com/weekly-geopolitical-report-oct-26-2026/.
